Goldman sparks battle to seize control of Nine

In the past two weeks, Nine chief executive David Gyngell paid $85 million a year for the 2013-17 NRL broadcast rights and reached an agreement to sell its ACP Magazines to German publisher Bauer for $525 million.
Photo: Nic Walker

A group of United States distressed debt hedge funds has moved a step closer to taking control of Nine Entertainment Co after receiving a Goldman Sachs proposal to convert part of the media company’s $3.8 billion of borrowings into equity.

It is understood Goldman was preparing to put the proposal to Nine Entertainment’s lenders, including hedge funds Oaktree Capital and Apollo Global Management, on Sunday night. It is the first time owners of the business formerly known as PBL Media have acknowledged that its debt mountain means control will change hands.

Goldman manages mezzanine debt funds owed around $1 billion by Nine and recently formed an alliance with the media group’s owners, private equity firm CVC Asia Pacific, which bought PBL from James Packer for $5.6 billion in debt and equity in 2006-08, before the global financial crisis struck.

Under the Goldman proposal, lenders owed $2.8 billion in senior debt, led by Oaktree and Apollo, would emerge with a 70 per cent stake in Nine Entertainment. The Goldman funds would give up their debt for the remaining 30 per cent, with a small portion going to CVC. This means the vast majority of CVC’s $1.9 billion equity investment will be lost.

There is no certainty Nine Entertainment’s lenders will endorse the proposal, which could form the basis for further negotiations.

“There may be more brinkmanship," said a source familiar with the situation, “but it does show for the first time that both sides will have something serious to talk about."

The hedge funds remain in a powerful negotiating position as they control the senior debt and rank before the Goldman funds and CVC. They will have the final say on the Goldman proposal if it is put to lenders as it is likely to be decided by scheme of arrangement that requires a 75 per cent yes vote.

Nine owns east coast free-to-air television stations, Ticketek, 50 per cent of the NineMSN digital business and ACP Magazines. The TV business has had a strong year in the ratings through programs such as The Voice, Howzat! The Kerry Packer Story and its coverage of the London Olympics.

For the likes of Oaktree, which has bought Nine Entertainment debt at discounted rates over the past 18 months, the payment at 100¢ in the dollar would represent a premium.

Under the Goldman proposal, Nine would retain $1.25 billion in debt through a new five- year facility. Interest rates would be twice as high, in keeping with the higher cost of debt since the GFC. Nine’s leverage would drop from 10 times EBITDA to around 4.5 times, although some lenders may regard the new figure as still too high.

Lenders could use the scheme process to push for a greater share of equity or a smaller amount of debt. The proposal will allow different lenders to elect to take debt or equity.

Goldman is likely to argue that it has engaged constructively with other stakeholders and that the proposal ensures an orderly handover of the business. The proposal also means Nine Entertainment stakeholders will not have to contemplate the prospect of the business going into receivership.

The company is close to breaching a key loan agreement relating to its debt to earnings ratio at the end of the month. “The company can’t afford for this to blow up," said a source close to the situation.

The Goldman proposal values the business at $2.6 billion or 10 times earnings before 2012-13 interest, tax, depreciation and amortisation (excluding earnings from ACP, which are forecast to fall from $100 million in 2011-12 to $80 million this financial year).

This is a lower multiple than the 11.5 times EBITDA that CVC paid for Nine or private equity firm KKR paid for a stake in Seven Media Group in 2006, although these transactions were completed in more buoyant market conditions.

The publicly listed Ten Network Holding, which has struggled to produce decent ratings this year, currently trades at 9 times EBITDA.

It is believed the Nine board, including chairman Peter Bush and Mr Gyngell, were notified over the weekend.

The mezzanine funds controlled by Goldman have watched their exposure grow in the past year because they have elected not to take interest payments in cash. The funds have also made it clear to stakeholders that they were prepared to have their stake converted into equity.